Energies
The U.S. Department of Energy said that crude oil supplies were up 3.0 million barrels last week at 296.9 million barrels, more than expected, and 100,000 barrels were added to the Strategic Petroleum Reserve. September crude oil dropped $15.88 or 11% to $129.47 to post its largest one week drop in history. The prognosticators fail to point out that even with the recent sell off prices are still up over 60% ytd, so we are not out of the woods just yet. Next support comes in between $122 and $124 with resistance at $133, followed by $139 on September. We would caution traders to throw in the towel for higher prices and to shift to a bearish bias as the recent decline has taken prices to over sold levels and we still would not rule out a trade above $150 in coming weeks to months. For now we would stand clear until the sell off has fully run its course.
Supplies of gasoline were up 2.4 million barrels and heating oil supplies were up 1.3 million barrels. Over the past four weeks, gasoline demand was down 2.1% from a year ago while distillate demand was up 2.5% from a year ago. In terms of price, RBOB was a looser shedding 38.26 cents, or 11% trading to levels not seen since the first week of June. Support comes in at $3.12 followed by the 100 day moving average at $3.0650. September heating oil lost 43.12 cents or 10% and was successful in filling a gap on charts from early June. Significant support comes in between $3.55 and $3.60. We will most likely look
for a long entry in heating oil, but would like to see a confirmation of an interim low and reversal in both heating oil and crude before initiating longs for clients.
The U.S. Department of Energy said that underground supplies of natural gas were up 104 billion cubic feet last week to 2.312 trillion cubic feet, more than expected. Supplies are now down 14% from a year ago and down 2% from the five-year average. September natural gas closed down $1.40 on the week at $10.64, the lowest level in three months. Late last week we saw a quick $3 drop and have now reached the 50% Fibonacci retracement level. With prices extremely oversold, expect prices to reverse and find their way to higher ground on warmer than expected weather or a hurricane forecast. We are pricing out-of- the-money call spreads for September and may probe futures from the long with stops below last week’s lows for clients this week.
Livestock
Total beef imports are expected to fall 12% from last year. Exports are expected to expand as Japanese and NAFTA markets have been strong heading into the peak of summer. Live cattle imports are expected to be above last year's levels. Imports from Canada continue to have a higher percentage of feeder cattle due to more advantageous feeding opportunities in the United States. After the close Friday, the USDA estimated the week's beef production at 530.1 million pounds, down .2% from a year ago. August live cattle ended down 2 ¾ cents at 97.50 and are currently trading at 8 week lows. The 100 day moving average gave way last week and prices may attempt to fill a gap at 96.40 from April, but we are still looking for a reversal soon. We recommended a light long last week and if you are holding a looser don’t add to it just yet. If you took the long off, look to re-establish longs in August or October once prices turn. August feeder cattle closed 212 points higher, but we are still waiting for a push through 114 and to the contract highs at 116.50. To reiterate the same message from last week, we currently prefer feeder longs to live cattle. Look to add to longs on setbacks as we see feeder cattle tracking higher.
Last week the USDA estimated pork production at 423.6 million pounds, up 9.4% from a year ago. Hogs were up on the week at varying levels depending on the month; currently we are working clients out of August longs and getting positioned long futures and options in October and December. Support on October comes in at 71.60 with resistance at last week’s high; at 74.00.
Financials
Stocks: The minutes of the Fed's latest meeting said that "members generally agreed that the risks to growth had diminished somewhat since the time of the last FOMC meeting, while the upside risks to inflation had increased." Apparently, Chairman Bernanke's outlook for the economy has gotten more pessimistic since then. Although we are seeing a recovery, we would not buy into this as the beginning of a bigger move. Whether armed with a squirt gun or bazooka, the Fed is running out of ammunition to support the stock market, we would advise using this rally to exit longs and continue to suggest investing defensively. Stocks are bouncing off 2 year lows on decent volume, but we don’t think we will get much more than bounce as circumstances are not any different than they were to cause the recent sell off. Also, what we are seeing more so than a commitment of new money, is the shuffling of money that was already in the market. The Dow ended last week up 396 points, or 3.6% at 11497. The S&P rose 21 points or 1.7% to 1261. The NASDAQ added 44 points or 2.0% to 2283.
Bonds: The U.S. Labor Department reported that CPI and PPI were up to levels not seen in decades. Excluding food and energy, prices were up but to a lesser extent. Although the government refuses to include energy and food in their core numbers, inflation is affecting consumers as the rise in energy and food is spilling over into almost everything. With inflation readings near 5.0%, yields must move higher to encourage any money to stay in treasuries; with higher yields we will see prices back off.
